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How To Price a Forest, and Other Economics Problems

A Cambridge economist discusses wealth, health, and disaster.

Gross Domestic Product is the market value of all goods and services produced within a country in a year. It is, today, the standard…By John Steele

Gross Domestic Product is the market value of all goods and services produced within a country in a year. It is, today, the standard snapshot of a country’s economy. But does it deserve this position? After all, it focuses on economic activity while ignoring many of the consequences of that activity, economic or otherwise.

Cambridge economist Sir Partha Dasgupta has long argued for a broader measure of a country’s wealth, and has worked on some of the most difficult challenges involved: How do you assign a dollar value to a forest? To human capital? How do humans understand long-term planning, and the effects of their actions on fellow citizens?

Dasgupta and I met in the Vatican Gardens in Rome, where we were both attending a symposium organized by the Pontifical Academy of Science and the Pontifical Academy of Social Science. Among the most lively and engaged of the symposium participants, Dasgupta challenges us to cast a critical eye onto how we assign value, and how we make decisions.


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Why has Gross Domestic Product (GDP) persisted as a measure for all these years?

That’s a deep question and I wouldn’t know how to answer it. What I can say is that GDP was constructed, defined, and then began to be used for a very different purpose than the one we think it was designed for. It was originally designed to give an idea of the level of economic activity. Remember, in the 1930s something like 20 to 25 percent of the workforce was out of work in the United States and the United Kingdom; a great number of factories lay unused. So an indicator was needed to describe the extent of economic activity, because that was of paramount importance. Somehow, 20 or 30 years down the road, after the war, when developing countries were concerned with improving the lives of people, GDP became an indicator of economic progress. And it shouldn’t have been that, because bear in mind what GDP measures: It measures the market value of final output. So it does not deduct the depreciation of assets which may accompany the production of goods and services, and particularly it doesn’t deduct the depreciation of nature, mines, destruction of ecosystems and so forth which might be required or which is put into place in order to produce goods and services that we consume. So it’s a non-starter as an indicator of what the future may hold of what we are doing now.

What should economists be most concerned with measuring?

Ultimately we social scientists should be concerned with human wellbeing, the quality of lives people lead. That sounds very metaphysical or perhaps repugnant to the hard-nosed social scientist, a policy maker. But at the end of the day that’s what it’s all about, otherwise we should just call it a halt, call our enterprise a halt. The question is not how to measure human wellbeing, because that’s an impossible thing, but whether you can find some metric which more or less approximately corresponds to it. So two things can move in the same way, even though they are not the same thing. The metric which best, and it can be proved to be so, mimics movements of human wellbeing, no matter how you define human wellbeing, is the measure of wealth. Wealth was originally a word used to define wellbeing, but that’s not how I want to use it. The result I’m quoting, the metric that you were asking for, is a value of all the assets an economy has inherited from the past. And the assets include not just buildings, machinery, roads, and equipment, the stuff that we typically think of as being capital goods, but also our health and education, which now economists all agree consist of asset, which we call human capital. But a third category, and that’s the one we are discussing here at the Pontifical Academy, is natural capital, nature, which comes in abundance and in various forms and sizes, so to speak.

Let me give you an example of why wealth, which is the value of these assets, could be going down even when GDP goes up. Imagine now, just to take a simple example, suppose you convert a huge swathe of wetlands and construct shopping malls, just as an illustration. Now, in national accounting, from which you can estimate GDP, the shopping mall will be an investment; the amount that you’ve spent will be counted as investment. But the fact that you have lost the wetlands, the republic property out there, will not be costed, it will not be seen as a depreciation of your assets, because the wetland is lost and the wetland was supplying lots and lots of services, birds and bees, pollinators, cleaning up water. There’s a huge amount of services that a wetland does and I needn’t enumerate1 that here. But that loss will not be counted against the project.

How can economics calculate the value of nature itself?

What are the sounding blocks? The mineral subsoil resources, they are not too bad, that can be done and that has been done. We have very few estimates of stocks of fisheries, for example. So never mind valuation. Governments don’t even estimate what’s out there in terms of stocks. So it’s crazy. It’s like a household. Somebody comes and says what do you own? And they won’t know whether they have pots and pans in their kitchen, they won’t know how many beds they have, they don’t know if they own the house, or if they’ve forgotten a cottage.

I like to think 20, 30 years from now we’ll be in a much better position to talk about the wealth of nations.

So national accounts are disgraceful because national governments aren’t encouraged to actually have a, if you like, an inventory of what people have at their disposal, one person or the other. Fisheries, for example—for most countries you will not be able to get estimates of the stocks of fisheries, inland fisheries or coastal fisheries. Then there is all this factory out there, forests, wetlands, mangroves, they are churning out stuff, churning out services which you’re using either in extractive form or just using as invisible inputs into production. Do we have an inventory of that? Very little. Forest cover we do these days, because you have satellite imaging. But remember, look at the number, you have forest covering acreage or hectares or millions of hectares, but it’s not going to give you very much about the composition of forest. You might say it’s deciduous or tropical, but what’s in there, the species in there which is churning out all that stuff, most of it is not in the national accounts, not even in the most crude approximate form. So we have been able to use the timber value of forest in constructing wealth measures using market prices, but we have not been able to devise methods to estimate the services forests provide in, say, preventing floods—other services that we know nature offers. So they’re all missing. So it’s very, very early days now and I don’t apologize for that. If I have to apologize, I should apologize on behalf of my profession for not having done this 30 years ago or 40 years ago, but we haven’t and we’ve started. I like to think 20, 30 years from now we’ll be in a much better position to talk about the wealth of nations.

Let me give you a simple example. It’s not a complete answer to the problem, but suppose the forest recedes from the village center because there’s over-extraction. Then to heat your home, to cook food, you have to walk a longer distance to collect firewood. Now you could as a first cut estimate the time cost, energy cost of walking, say two kilometers, three kilometers to pull back a few kilograms of firewood. So you could try and start valuing things that way.

Is the free market to blame for not assigning value to the environment?

I’m no longer convinced of that. It’s an easy answer for me. I’m left liberal, I can easily criticize the market. I don’t. I think the kind of free market religion that we’ve experienced in the last 20, 30 years is something that’s easy to ridicule and should be ridiculed; there’s no question about that. But when I think about the Soviet Union, I’m not crazy about what it did to nature there, so I don’t think it’s that. It’s just that we are lousy people, you know, people are lousy. We don’t know how to live collectively. You could have a religion of one kind or the other, could be communism or it could be free market, but some could be very short-sighted because it doesn’t pay very much to care about the future. But when I say it doesn’t care about the future, this is something that puzzles me to no end. We all care about our children, each parent. It’s hard for me to imagine a parent who doesn’t invest in his child or care about the fact that there’ll be grandchildren. I don’t think myopia or short-sightedness which we ascribe to capitalism comes from that, that we don’t care about our children. Each of us does. The problem as I see it is that in no society that I can think of is there an absence—and in most societies there is an awful lot of it—of unaccounted for consequences for others of the actions that we each take. When we do some damage to nature and we’re not charged for it, that’s an unaccounted consequence for others, future generations and so forth. So we have a collective action problem, that’s what it really amounts to, and that collection action problem will not disappear anytime soon; it will never disappear. And the origins of market fundamentalism, if you want an intellectual basis for it, was that there will not be any unaccounted for consequences because everything will be priced, so you’ll pay for every consequence of your action. But, of course, market fundamentalists don’t remember that theorem, so they apply it to a world in which all hell breaks loose in terms of what we call externalities, and we still say, well, the market still works. So we have a serious problem of understanding the conceptual basis for a social philosophy.

How do you objectively value natural and human capital?

There will be some which will be very subjective; that goes without saying. And I think in a democratic society what you do is you come upfront, you give ranges of values. And I think that’s another message I transmit to my students, which is in the social sciences we should not seek point estimates, which is another way of saying a number of something, it’ll be ranges for most things, lower bound, upper bound and even that you can’t be sure, somebody might claim. But then dialogue is the way to reduce that range. Somebody comes along and says “I love this so much, this is worth $50 million in terms of other commodities,” and you say, “well, really?” Then you offer him choices and then you find that actually he was over-estimating and he himself says, “oh no, of course I didn’t mean that, what I meant was that I really like it,” and so forth. Of course, this is not really a matter of personal taste. We’re thinking of a social evaluator, somebody who is responsible enough to be detached from the observation and say, well I’m representing not just myself, but I’m representing others too in this valuation. It’s a bit like a person who goes to vote on polling day. Now, I like to think many of us vote against our private personal interests; in fact we do, otherwise it’s very hard to explain why rich people have been known to vote for progressive income tax. There is some notion of citizenship even now residing in many of us, or some of us. It’s that that I’m putting out, that in some sense you’re trying to reflect, represent others, and certainly a public policy maker, decision maker, must do that. I really don’t like the idea of even GDP being given as a particular number. There should be ranges of values, because we’re missing so many things. I mean, when you construct GDP you miss black markets, the informal market. So even GDP is not measured correctly, but then we try and pretend that we know what that number is. So in the case of wealth computation, there will be a great deal of uncertainty, there will be a great deal of differences of opinion and so forth, and the idea will be to narrow down the differences through reasoned discourse amongst people and experts. And somebody will come along and say, “no, you’re really overestimating or underestimating the damage that’s likely to happen in the Mediterranean coast in the year 2100 if we go beyond the two degrees to three degrees” or something. It’s very reasonable. Experts disagree, and I think we really have to come to terms with the fact that when we make a decision we should ask for numbers, decisions should not be based without any empirical evidence, but we should equally recognize that decisions will have to be made even though you will not get one number but you will get ranges of numbers. And at the end of the day it will be some gut feeling, some reasoned discussion and then say let’s keep our fingers crossed and hope we’re doing the right thing.

What do you think the world will look like in 50 years?

I’m pretty pessimistic. I don’t believe humanity is going down the tube; that is meaningless. There will be always some rich people who will overcome the problems that we will face, and enough rich people. But I think the idea that we are in a universal movement towards progress, for example the idea that we will eliminate poverty in 10 years, 15 years, yes, we can do it for a short period, but the way we are attacking nature, the way we are handling nature, she’s biting back. She bites back at the local level; we already know that. Catastrophe is not a feature of the future. Villages have been wiped out in various parts of the world, as we know, over the decades, civil unrest, civil war amongst tribes, neighbors, which we have seen in our own time, are not exactly unrelated to resource scarcities. These are battles for resources. The epiphenomenon might be cultural divides and so forth, but at the end of the day when you’re very poor you worry about who’s going to feed your child, and our baser instincts, our nobler instincts are suppressed. So in my judgment we have seen enough of that. To think that those things can be cured on a large-scale basis, I don’t have many hopes because we are doing enormous damage to the oceans, we have done enormous damage. Obviously the theme of this conference in large measure has been over climate, and God knows what we have in store in 30, 40 years’ time.

I don’t think we have in the modern era come to terms with the fact that collective action is required with the greatest urgency at every level.

Now, it doesn’t really mean that, as I say, the idea isn’t like that we’re all like lemmings, we all fold under the roof. No, it’s not going to happen like that. The richest parts of the world will find ways, because they have enough resources to be able to overcome the difficulties, at least in some measure. They may not be able to prosper as much. But I hate to think what’s going to happen in the drier parts of the world, sub-Saharan Africa, Northern India. I don’t know what will happen there, but to think that it’s all progress ahead of us if we get our institutions right, I think probably we are a bit too late for that. Many of these processes have very long-term irreversibilities. I mean, my climate science friends tell me that even if you were to have a zero emission now, the cumulative effect of the past will come to terrorize us in some form or the other in the future. So I think we’re going to see deep poverty in various parts of the world, even as we move in whatever direction we have to move, because we’ve set in motion processes which are amazingly tenacious, some of them being our own habits. I don’t think we have in the modern era come to terms with the fact that collective action is required with the greatest urgency at every level, community level, and there is collective action at the community level; we see it everywhere in some form. At the national level far less so, and of course at the international level we see mainly disappointments. So we’ll survive, but this idea of progress which we have become accustomed to over a 250-year period since the beginning of the industrial revolution, certainly in the past 60, 70 years, I mean since the end of the Second World War, there’s been this very optimistic and rightly so, optimistic view with the knowledge that we had that reasoned behavior will take us there, but we’ve been using the wrong metric.

Can humans think long-term?

Yes, we do. We think about our children. I come back to that. We think about our children, we think about our grandchildren. I have grandchildren, I think about them, and in fact I pass resources on to them. It’s the damned unaccounted for consequences, it’s the fact that many of the things I do are accounted for in the sense of what happens to others. That’s where collective action is needed. So what we think very often, in fact my economist colleagues are very often mistaken in this, they think that behavior which looks like myopia, driven by myopia, is actually on account of myopia. The absence of collection action, if you have a problem of the commons which you’re familiar with, then your behavior is going to look as though it’s very myopic. Then you may go on bleating and saying, “oh gosh, if only we were more far-sighted.” But it’s not far-sightedness which is the problem; the problem is not being able to cooperate with others, and saying, look, I’m damaging you, you’re damaging me, or I’m damaging your grandchild and you’re damaging my grandchild. I care about my grandchild, perhaps I don’t care a lot about your grandchild, and vice versa for you, but don’t you think we should get together and protect our grandchildren? We’re not doing that. We seem to be incapable of doing that and we are not doing it, I think, in large measure because we’ve got our own model of the universe, the social universe, all that stuff up there. We think we can just keep on producing goods and services which are all privatized. Human capital is private. Your human capital is your human capital. You can’t sell it to me. You can rent it to me but you can’t sell it to me; slavery is not allowed. So, in a way, our economic conceptual model that we have imbibed and that drives our political system essentially sees privatization as the basis of these goods are private. So, of course, if public goods are scarce, what does an intelligent man do? He creates private goods, which in some sense substitute for the public good. You will agree?

Well, if we all do that, the need for the public good becomes less urgent because we have got ourselves embedded in a private goods structure. Then cumulatively you’re drawing down the public good, if that public good happens to be out there. It’s like having a polluted atmosphere, but then you have nice barriers, air conditioning and so forth, to clean it. Well then your incentive for cleaning up the air is a bit less, it’s lowered, except when you go out of course. But you’re protected. So the composition of our output, the stuff that we actually produce from factories, has been hugely influenced by our focus on GDP, and thereby the idea that we can escape from natural resource constraints by creating knowledge and new technologies and private capital. I think it’s a terrible state of affairs.

Why did you switch from physics to economics?

My original ambition was to be a high energy physicist, not because I had necessarily a great passion. I think it was a cultural thing, in the sense that in India at my time the best students went in for physics, so you followed the guy one year ahead of you who was top of the class, you wanted to be like him; in this case it was a him, goes without saying. So most kids, at least some of them, at least I did okay, let me put it that way. But just before I did my Ph.D. I did what’s called a Masters in Maths. Two things were going. One was that physics at that time, this was the mid ’60s, high energy physics was going through a bad period. There were some hurdles which I couldn’t appreciate at that time, obviously what the hurdles were even. But the courses I took were very computational, they didn’t have any robust theory behind it. The big breakthroughs in theoretical physics, high energy physics, took place about ’67, ’68, that sort of period, and then it sort of took off in a big way, so I’m told; I have no firsthand knowledge as I’d given it up by then. The other thing was the Vietnam War. I was very against it, like many of us were at that time. I was in England, so I took part in marches. Now, the only thing is that I wanted to understand why countries go to war and so forth. You know, for a maths/physics student these were big revolutionary questions. I didn’t know then that nobody had an answer to it! But I thought maybe The Economist had, and certainly at my time the most interesting contemporaries of mine were economists who did nothing but discuss these issues, and many of them were Marxists. So I fell in their company and thought this would be a nice kind of a thing to study, and I was encouraged by my subsequent Ph.D. supervisor to move to economics. He guided me rather brilliantly, because he came to economics himself from maths, and following him meant that he could root me in a way where I could take advantage of my maths background and overcome the disadvantage of not knowing any economics, and yet get my Ph.D.

Issue 015

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